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ROBERT E. RUBIN: Good afternoon.

I'm Bob Rubin and let me welcome you on behalf of the Council on Foreign Relations to today's meeting, with is part of the C. Peter McColough Series on International Economics.

And I was also asked to announce that the next meeting will be on May 7th and we will have the good fortune of having with us Wilhelm Buiter, who as you know, is at the London School of Economics and has recently joined Citigroup as its chief economist.

Please let me remind you to turn off your cell phones and various other assorted gadgets. And don't just put them on vibrate, because apparently they interfere with the sound system.

Also, this meeting will be on the record, and that will relate as well to the questions from the members.

It is an enormous honor for me today to introduce our speaker. And in keeping with council tradition, I will not recite from his resume -- you have it in your materials -- but I will make a few framing comments. Then after our speaker's remarks, he and I will chat for a moment or two and then we'll spend the predominate part of our time responding to your questions.

As we all know too well, for more than two years now, the United States and the global economy have been experiencing the worst financial and economic crisis since the 1930s. Many countries have responded -- I think, without doubt, appropriately -- with fiscal stimulus to face dramatic reductions in demand.

However, in many cases, that stimulus has been placed on top of already existing substantial structural fiscal deficits. And at this point, many of the major industrial economies are on unsustainable structural fiscal paths for the years and decades ahead. That in turn presents a new set of challenges to the global economy, while at the same time recovery still has a long way to go with its own uncertainties.

And to connect the economic framework with the subject of today's conversation, the conditions and policies in many economies -- with respect both to the crisis and to fiscal matters -- have had powerful effects on other countries around the globe. And that evidences just how interdependent the national economies or the global economy have become. Unfortunately the architecture of the global economy has lagged far behind these realities of interdependence.

I had the opportunity to work with our speaker as a member of the G7 finance ministers and central bank governors meetings in the 1990s. And he was clearly the visionary amongst us in recognizing our growing connectivity. And today, he is universally respected for his strong leadership on the imperatives for and the impediments to the transnational economic coordination that is so critically important to all of us.

So without further ado, we at the council are most fortunate and deeply honored to have as our guest speaker the president of the European Central Bank, Jean-Claude Trichet, to discuss with us his thoughts on global governance in the world of today and tomorrow.

Mr. President. (Applause.)

JEAN-CLAUDE TRICHET: Thank you. Thank you very much indeed for your invitation. I appreciate enormously to be here to meet friends -- a lot of friends. I have a memory of being introduced here by Bill McDonald, by Richard Haass and all. I would say, the presence of so many friends is rejoicing.

Of course, Bob, you were very, very frequently the able president of the G-7 and all kind of Gs. And I have the memory -- a very vivid memory of the way you were so ably chairing these meetings. You introduced something which did not exist, in my observation, in the G-7 before you, which was after very, very difficult meditation on the difficulty of the time. We had a dinner, which was totally open and where we were, you know, reflecting philosophically, if I may, and meditating on the time. And it was also extraordinarily interesting and stimulating. And I have to say that now that global governance is changing, perhaps we would miss a little bit this dinner chaired by Bob.

So again, thank you very much for having invited me.

I have a speech, which is public. You will have the speech. I know the whole of the game here is that questions and answers are very important. So I will compact the speech, if you permit, and elaborate on a number of messages that I trust are important at each stage, in order to be sure that I cover the main points without being too fastidious in my exposition.

First, I would take what you said, Bob, on this crisis. It was an unexpected crisis -- largely unexpected in its dimension and in its global nature -- even if it was clear that a number of academics; a number of central banks, I have to say; and also, a number of at his own institution very, very clearly -- the BIS -- had signaled that we were living in a world of general under appreciation of risks in the financial markets. And I have to say I was, myself, on record for having said that quite a time before the first turbulences erupted.

But that being said, what we have observed is really something which was very big -- bigger than was expected. And with a number of features that were really also unique.

In particular, I would note the fact that it was the first time we had really -- at the moment of the intensification of the crisis -- a global phenomenon where absolutely all economies, all sectors -- whether industrial or financial, corporate, non-corporate, emerging, industrialized -- we were all touched. And that it was, of course, something which we had not observed before. We had before phenomenon that were localized and mainly in the periphery of the, I would say, of global finance and not universally spread.

We also had something which for me was really extraordinary and was the first stress test, if I may, in real magnitude, unfortunately, of the new globalized world in which we are, which was the rapidity of the transmission of the shock.

After mid-September, the intensification of the crisis, it was really a question of half-days to measure the rapidity of the transmission -- and again, all over the world, all over different sectors. That is something which I never had observed before. I had, you know, the experience of a number of crises unfolding, but it was taking months, sometimes years, to see the dimension, the global dimension, or the continental damage the crisis will lead to expand and to materialize.

So there we had something which was, again, exceptional, not only in quantity but in nature, if I may. And we had to cope with this without any textbook telling us what we should have done or should do in real time. The central bank were left with their own judgment and their own capacity to appreciate the reality of the situation in a very short span of time.

Again, the non-conventional measures in which we engaged on both sides of the Atlantic and all over the world were not in any textbook, and we did things that were not easy to decide upon, I have to say. We had this experience of very big decisions having -- calling on us, a lot of judgment in a few hours.

Of course, we were mentally prepared. Of course, we had the feeling since a certain period of time that something was looming. But in August '07, when we saw that we had something very big which was there, we had to decide or not to engage in. And what we finally decided -- namely, full allotment, fixed-rate operation, which turned out to be 90 billion Euros -- you might remember that it was a shock, of course, all over the world to see that something was calling for such a big response.

So, again, this crisis has, in many aspects, called on all of us an enormous amount of rapidity in the decision, imagination and boldness in the nature of the decisions, and have to say also courage, because it's not that easy to take those decisions.

For the governments, for the executive branches, I have to say it was the same. It was the same. They had to step in. And I have computed with my colleagues in the ECB what the overall options that had been decided by the various governments, whether in the form of recapitalization, in the form of guarantees of all kinds, in the form of toxic assets help, if I might.

And I arrived to the figure of 27 percent of the GDP. When I add everything, of course, a very, very large part of this taxpayer risk has not been utilized at all, very fortunately. The part which has been utilized, because we won against the crisis, turned out to be a profit and not a loss. And that is, of course, extremely fortunate.

And unfortunately, part of it became losses because we had, on both sides of the Atlantic, had to cope with a situation which were, at the individual level, really desperate.

But the fact is that we put on the table, on both sides of the Atlantic, something on the order of 27 percent of the GDP of taxpayer risk. And that, of course, is another way of looking both at the dimension of what we had to cope with and the courage and the determination of governments, executive branches and parliaments, in such exceptional circumstances.

This drives me to the consideration that it is an obligation for all of us -- and I'm speaking for the public sector, of course, but also for the private sector -- all of us to do whatever we can to put the system not only back on its feet, but in a situation which would be much more resilient, because I take it that if we had, under more or less the same circumstances, to cope with the same kind of challenge, I'm not sure at all that we could do what we have done, obviously; namely, take the set of decisions that have permitted to avoid the great depression and retake -- regain control on this dramatic succession of events and have, finally, the recovery which we have at the global level in front of us.

I take it that the probability that some of the decisions would not be taken, because it was really a close call at certain moments. I take it also that the probability for democracies -- and I'm speaking for all democracies -- to redo what they have done is also bigger. That's my perception. And again, then if we are not doing the job -- and I'm speaking both for the public sector and the private sector -- if we are not doing the job to put global finance and the global economy, by way of consequence, in a much more resilient situation, we could, again, not avoid a dramatic depression.

So there is, again -- I insist on that -- it seems to me, an obligation of result, if I may. And it is what we trust in the present prime grouping for global governance, which is the G-20 at the present moment. And there, I am at the heart of the meditation you asked me to embark on, Bob.

I think one of the most important features of the present world is that we had an historical change of global governance, an historical change which had been prepared when you were yourself the head of this very important administration in the United States, with the creation, in the occasion of the Asian crisis, of the G-20, which was not the prime grouping for global governance, but was a very important grouping, obviously, particularly for the working out of standards and codes and rules and regulations. But the prime grouping for global governance was, at the time, the G-7.

So the core, if I may, of the industrialized world in terms of dimension was clearly the heart of global governance, at least in its dimension, which is the informal grouping. And I see there France that -- we are the heart of the preparation of this global governance in various G-7 at the level of heads.

All that being said, we have now shifted the battle. The battle is not now in the hands of the industrialized world. The battle is in the hands of a grouping of countries which comprise the industrialized core countries and the emerging economies.

And one of the indivisible events which was in the succession of events in Washington last days was that there was no G-7 communique and there was no G-7 briefing. The communique and the briefings were the G-20.

So again, this is at the level of global governance, something which I trust is of utmost importance. And I would say that we owe this transformation -- which, again, has been prepared; it is something which didn't come as a shock and, I would say, unexpected event, because the G-20 existed already. But this shift from the G-7 to the G-20, we (owe it ?), it seems to me, obviously, because it was overdue that these economies that were obviously systemic at the global level would have a full ownership of this global governance at the level of this informal grouping that I mentioned. And that's of course something which appears absolutely obvious.

I trust also that there is a second reason. Perhaps the industrialized country proved that they were quite clumsy themselves in running their own economy, which were -- and remain, of course, at the core of global finance and of the global economy, and that is something that we have to take fully into account. And it's -- (inaudible) -- upon the industrialized country to be themselves fully conscious of the fact that they have their full role to play in the G-20 because they remain fully responsible for a large part of the core of global finance and of the global economy.

And again, I said already that, in my opinion, we could not afford a second time to have to cope with the challenge that were dramatically erupting a few years ago. But it would be particularly -- I have to say, for the industrialized world, particularly dramatic if it proved that it was impossible himself participating fully in the G-20 to regain control of this evolutions.

Let me say a word on something which has happened also quite invisibly, but in front of eminent central bankers. I cannot help mentioning also that in the cooperation between central banks we had large, very large ownership -- which has been prepared by the creation of the global economy meeting in Basel, by the full participation of a large number, a very large number of central banks in our discussions in the preparation, in the, I would say, orientations that we were giving to a number of committees that are not very visible but very important at a global level.

But there also we had shifted the prime grouping for governance at the level of central banks. It is now another G-10 who is the prime grouping for governance of central banks. It is the global economy meeting which again comprehends a large group of central banks of the industrialized world and of the emerging countries. And this is something which, of course, is parallel to what has been done at the level of the ministers, and governors, and at the level of heads, and which is also illustrating to which extent, at the moment of these crises -- which, again, in its quantity and quality, if I may, is so dramatic, is coinciding with a very, very important and dramatic change of global governance.

Now, I don't want to elaborate on how we fared during the crisis. I don't want to elaborate more on the G-20 or on what goes with the much, I would say, larger ownership of global governance at the level of the central banks. I already mentioned that we had changed the system of governance of central bank operation. But we have the Financial Stability Board -- which was also anticipated at the moment of the Asian crisis, Bob, the Financial Stability Forum, which has been reinforced, given a mandate which is enlarged, and which is much more inclusive. At the time it was a G-7 grouping, and it is now, again, more or less incorporating, in various forms, this global new ownership of governance.

Now, let me perhaps conclude. You gave me, very generously, a quarter of a hour. Let me conclude to mention a number of -- a small number of points, which seems to me very, very important at the global level, on rules and regulations on the one hand, and on the overall mutual assessment of the macro-policies of the members of the G-20.

I trust these are the two sides of the coin: If we want to be as sure as possible that we make the world a much more resilient entity -- the global finance and the global economy, we have to be as active as possible in being sure that all the new rules, regulations, standards and codes that we are working on, and in all the dimension of global finance, would be, I would say, well-prepared and as optimum as possible, and we have also to care for the macro policies.

On the first side of the coin, I would say it is of utmost importance that the new Basel rules that we are preparing, and we are in an intense phase of discussion after having had the input of the industry -- the industry was in dialogue with the Basel committee, we have this industry response and now we have to engage in calibration, and a calibration exercise which is, of course, of utmost importance. And we have to engage in the impact studies to see exactly how to optimize the new rules, particularly in terms of capital requirements, in terms of liquidity monitoring, and all what is the core of the new banking supervision. And I'm speaking under the control of -- (inaudible) -- who knows that better than anybody.

But what I would insist on is that it is extremely important that we have really a level playing field, that we have really, at the global level, the same rules being applied by all. This is very, very important, in my understanding. Of course, for the good and appropriate functioning of global finance, it is extremely important that we, in this new ownership of global governance, have, particularly on both sides of the Atlantic, the implementation of the same rules in the same fashion; not to create the sentiment between us, on both sides of the Atlantic, that we are not in the same universe, which would be a -- would be a very big mistake. And also, with all the friends that are coming from the emerging world, not to give the abominable example, then after having created the G-20 as the prime grouping for global governance, we are clumsy enough to have difference of views and not appropriate implementation on both sides of the Atlantic.

This is true for the -- it's true for absolutely everything, of course, for the Basel rules I would say also, of course. But I know that it is delicate for the accounting rules; we cannot afford to have different rules -- significantly different rules on both sides of the Atlantic and at the global level, with the ISB on the one hand and the FSB at the other hand. This is also something which has to be fixed. It is extremely important.

And I could give another set of such examples. They are areas where it is really very important that the core standards, the core principles are applied in the same fashion. Of course, there can be some differences on a country-to-country basis, but, again, we have to be very, very clear on this element which is key, in my opinion: the level playing field at the global level. I could elaborate more on that.

The questions perhaps will permit to explore more, because as you know, we are not only dealing with the banks themselves; it is the full body of the system which is at stake -- the non-banks, the markets, the transparency; the principle of having much more transparency; much less short-termism if possible -- I know how difficult it is; and much less pro-cyclicality than we had in the previous system. These are the main avenues, but it has to be applied in all part and parcel of global finance.

(Inaudible) -- that it is the conclusion on the other side of the coin, which is the appropriate surveillance at the level of the systemic economies of the world of the whole macro policy, to be sure that we are not permanently creating, paving the way for major difficulty because the constellation of imbalances would be such that we would know that at times we would have a sharp and abrupt correction.

And that, of course, is something which is extremely important which has been already tried in the past, I have to say with the multilateral surveillance. But very sullenly the 20 have decided to embark into this new kind of concept of mutual assessment of their own policies, helped by the IMF, but with an element of peer surveillance. And there it seems to me, the stakes are extremely high.

We knew the difficulty. We knew the enormous difficulty in a world where the global economy or global finance are now the pertinent entity. We had the demonstration that it was the pertinent entity. At the same time we have no global government, we have no global executive branch and no global parliament. So we have to coordinate appropriately our various decision-making processes for those decision-making processes to internalize the externality that is associated with their own decision at the global level. And of course, I'm speaking in front of the citizens of a very, very great democracy.

The tendency of our democracy is to be inward looking and I know that myself very, very well. There is an irrepressible tendency to be inward looking. What we need is exactly the contrary. We need to be sufficiently looking abroad to understand exactly that the optimum is not necessarily the suboptimum at the level of this particular economy and country -- and I'm not speaking, of course, particularly of the U.S., I'm speaking of all the participants -- but that it is something which has to be replaced in the context of a larger optimization at the global level.

We are all cold now, and that's the reason why, I think that the communication and explanation, tireless explanation of -- on the real world, in which we are, is necessary because our political leaders are depending -- the democracy, this is very reassuring -- on their own people. And if their own people understand, in general who they are, the task of course of the leaders is considerably simplified. If communication is poor, explanation is poor, and I'm thinking not only of course what is being done by the leaders themselves but by all the communication channels that exist in our societies. If that job is not done correctly then we complicate formidably what I call the second side of the coin.

So I see that I was perhaps a little bit too long, Bob, but I think that it's about time to sit down now. Thank you. (Applause.)

RUBIN: Jean-Claude, you were terrific. Let me just ask a couple of questions and then we will open the questions to the members.

I guess question one really goes to the last point that you were on. If you look across the industrial democracies, I think almost -- well, with the exception I guess of Germany basically, maybe to some extent your own country, France -- you see these enormous structural deficits and at the same time we've paced, and very often extended monetary positions -- central bank positions as well, certainly the United States with our quantitative -- (inaudible).

At the same time we have very high levels of unemployment and very slow economies. So you talked about getting back to a position where we reduced our structural deficits and our central banks put themselves in a position so we could be resilient again. How are we going to resolve the conflicting imperatives that both dealing with our short-term situation, which is very difficult, and our structural physical situation which is equally difficult and in a longer-term sense deeply threatening?

TRICHET: I think you're absolutely right that the balancing act is certainly very demanding. Now we have always said ourselves, even when we were close to the heat of the crisis, that in any case you have to do what was necessary on a short-term basis because you were in the situation which was extremely demanding -- it was true for the central banks, it was true for the government -- that at the same time one should never lose the medium, long-term perspective because if at any moment the medium, long-term perspective is considered to be put totally out of, I would say, sound concept, a sustainable concept, then it would play immediately against what is done in the short term through the -- (inaudible).

If our households, if the entrepreneurs if all the, I would say, markets are losing faith in the capacity to be sustainable in the long run, the mark of the present functioning of the economy is that then they lose confidence immediately and it goes against what is probably the goal, they need to help the recovery as where as possible. So one has always to take the appropriate decision on a short-term basis when, you know, situation is extraordinarily demanding, and not lose the long-term prospective.

And we always said ourselves that it is indispensable in our fiscal policies because, it was really your question, to be sure that in any case whatever is done, there is a going back to a sustainable position. I think that this is something that goes without saying normally, but of course in the heat of these dramatic events, that could have been forgotten. But now we are in a situation where nobody can dispute that every entity at the global level has to work out an appropriate medium, long-term recovery program for, I would say, public finance. And it seems to me that it's true in the industry as well. I have to say that in the emerging world we are in a different universe, we are in a different universe. They had their problem before, they had to go through the abominable crisis in Latin America and in Asia, but they learned the lesson the hard way and they are not in such a venerable situation.

RUBIN: You know, it's interesting, Jean-Claude, you reminded me of something. In 1993, when President Clinton put in place the Deficit Reduction Program, one of the comments he made, and I think it goes to this very point you just made about whether we can afford to let the fiscal imbalances -- whether we can afford to put that question off for a while -- he said that once -- at least it was his view -- that once he put in place the Debt Reduction Program that enormous positive feedback effects on confidence in the short term. And that he also felt that had he not done so that there might have been a more general lack of confidence -- the very point you made, which I think is a very good point.

Let me ask you this, Jean-Claude as a second question. You referred to surveillance and I believe you referred to internalizing externalities, which I think is a very good way to put it. You've lived the realities of the politics of trying to coordinate economic policy for a long time.

Do you think there's any realistic likelihood that we will figure out some way of creating mechanisms that will cause for example, the United States Congress to decide that it needs to look not only at its own country and doing what it thinks makes sense here, itself not an inconsiderable issue, but also, as you said, the externalities in terms of effects elsewhere or similarly the Chinese government looking at their exchange rate or the difference between export-led model and domestic demand grown model, and considering not only the internal effects but the external effects.

Other than more -- is there mechanism that you can foresee that would trade away some sovereignty so that we would have something more than just moral persuasion. And if not, what does that leave us with in an evermore-interconnecting global economy. These are the meditations we used to have at dinner, remember?

TRICHET: (Chuckles.) Yeah, exactly. That could have been one of your dinner main points.

First of all, it seems to me that it is exactly the heart of the main challenge. We have a global economy, which is the pertinent entity -- not only global financing -- it is a pertinent entity. We could see that we were so interconnected that again a single event could exert its own influence immediately all over the planet in a question of a half day. So that is a fact. It is also a fact that the various economies concerned are spontaneously, formidably inward looking. That's a fact.

My suggestion was that we had to make our own people -- I was speaking of democracies -- China has its own way to manage itself. But I fully agree with you of course that there is exactly the same problem there -- how to assure that you internalize the -- (inaudible). This is a -- (inaudible). It means how we make our own decision making processes in our democracies, our own people fully aware of the fact that they have to accept that the global stability and prosperity is essential as a precondition for their own domestic stability and prosperity.

Again, enlightenment of all. But I think very often, we put the blame on the politicians, if I may. But it seems to me -- it seems the full body of the society which is at stake, all those who knew should speak more in my understanding. All those who know should speak more. It is certainly a case of the -- of the real economy responsible persons of all opinion leaders.

Now, don't be shy. Don't be timid. Explain in which universe we really are. And I know of course much better Europe than the United States. What strikes me is that it's much more easy in a small economy, which is by definition very, very internalized because they are so small. So the people knows that what the rest of the world is doing is extremely important.

The bigger you are in an economy and the more -- the stronger is the culture of that economy predicting from external communication, of course, the more you have a difficult problem. And I will not be surprised in the biggest of the industrialized economy has a particular problem in this respect. But we have shown exactly the same phenomenon in Europe, I have to say.

RUBIN: I think of the -- well first, that was a very thoughtful response, and these were the kind of conversations we used to have. And secondly, I think it -- I'd just make the point that the world is complicated.

Why don't we now take questions from the members. Is there is anybody who does not perfectly understand the world, Jean Claude will provide you with wisdom.

Yes, sir. State who you are and briefly state one question, okay.

QUESTIONER: Kevin Harrington from Clarium Capital. In 2006 to 2008, the ECBU was one of the central banks that expressed a concern about the effect of oil prices on the movements of capital markets. And that in part led to your raising rates in July 2008, in spite of the economic slowdown that was developing at that time.

We're now faced with oil-back at 85 (dollars), but the money supply in Europe contracting. How do you balance those two as a central bank? Where does oil price -- where do oil prices have to go before one would switch away from a hyper-stimulus state to something else?

RUBIN: You can tell who runs a trading operation. (Laughter.)

TRICHET: First of all, as you know, we have a monetary policy concept which is based on two-payer strategy. But the objective is to deliver price stability in line with our definition, which is quite simple. We are very candid in giving the definition of price stability -- the yardstick to judge what we are doing. And of course, also we are candid in trying to anchor as well as possible in social expectations.

What we did at the period you have mentioned, we did it because there was the start of what we considered dangerous, the sentiment because we had a number of negotiations which were taking place. And we could see that the working assumption that price -- that the inflation in the medium term could be different from the definition of price stability was gaining in -- (inaudible). So that we were -- we had the threat of this unincurring of inflation expectations, which were before very well anchored.

And we took that decision to show our determination to solidly anchor expectation, and the need to deliver in the medium term -- in the medium long term our definition of price stability. It proved useful in the immediate I would say days or months which followed, because we could see that the negotiations were taking a different mode. Then of course, we had the -- what I call the intensification of the crisis.

And I have to say that in the intensification of the crisis, the fact that we had very solidly anchored inflation expectations helped us. We were never at -- below zero in terms of future inflation. So there was no materialization in the mind of the market participants and observers. And -- (inaudible) -- no materialization of the deflationary risks, which for us was a formidable help in the circumstances.

And now, what we are looking at is of course the multiple dimensions in which we operate. We consider that there is correct anchoring of inflation expectations. We see that -- we consider that, that for the present moment, we have inflation under control. And that the reason why, I have said that on behalf of the governing council, that the present interest rate were for us appropriate.

But that doesn't mean anything but it is our judgment today. I don't want to anticipate in any respect future decisions. You know that we have the theory according to which we are not pre-committed. We do always what we judge appropriate to deliver price stability in the medium term. And we are not the prisoner of promise or of a mechanism.

Now, you will tell me -- do you indeed deliver price stability according to your definition? And I would say, of course it depends on some -- of the price of oil, as you have said. But since the 1st of January '99, to the end of this year, I expect that the average yearly inflation would have been probably something like 1.95 percent. So our (definition ?) being less than two, close to two, it would not be that bad in terms of confirming that the -- (inaudible) is in line with the yardstick that we gave at the very beginning.

RUBIN: Yes, sir.

QUESTIONER: John Brademas. Sir, I am the first Greek-American elected to the Congress of the United States. And that's the background of my question. (Laughter.)

RUBIN: But you want to ask about France? (Laughter.)

QUESTIONER: What do you see in respect to the Greek situation? I yield back the balance of my time. (Laughter.)

TRICHET: I would -- you know that negotiations are taking place in Athens. And I would not comment because negotiations are taking place. I'm confident that they will be concluded soon and rightly. They are led by the IMF, by the commission and we are present also. I have a number of experts that are in liaison with the commission and are on the spot.

RUBIN: Henry.

QUESTIONER: Mr. President, I'd like to ask you a question concerning your major financial institutions in Europe. To what extent is their capital adequate today? To what extent do they still currently have major toxic assets? And to what extent are they capable to coming back as active lenders and investors?

TRICHET: Very important question of course. You know that the European economy -- actually the -- (inaudible) -- economy, -- (inaudible) -- the case for her all over Europe, the 27th, is massively financed by the banks, and not by the markets. So it has been the main difference between both sides of the Atlantic. And also, it explains why our non-conventional measures in Europe or in the ECB were different from the non-conventional measures taken in the U.S.

At the moment I'm speaking, we have observed I would say slight decrease in the rough figures we have of the outstanding credit with increase of the outstanding credit to households, in my memory over 12 months by 1.8 percent, and a decrease of the outstanding credit to the corporate by minus 2.5 percent or something.

Of course, in the U.S. where the financing goes massively through markets, I have seen diminution of credit outstanding by banks that were much richer, more impressive, if I may, in the negative figures, but it cannot be compared. It should not be compared because of the difference of structure.

That being said, I have to say that after the recession we had, it is normally -- our own observations over the previous cycle to see that the loans to households are picking up before the loans to corporate, so we had a decrease of both. Then we see now that loans to households are more dynamic, and it is always what we had observed.

That being said, we are calling our banks to do whatever is possible, of course, to reinforce their balance sheet, to reinforce their capacity to do their job, which is to finance the real economy and we are very, very active in that. We are telling them that we certainly did not embark into these very bold -- non-standard measures only for their own pleasure, that we were doing that exclusively to permit the appropriate financing of the real economy in circumstances which were particularly difficult.

We are very, very strong on that and our message is very strong. The magnitude of the issuance of new equity that we have observed in the (EU ?) here since the crisis, the start of the troubles and, of course, it started a little bit later than in the U.S., but is around 200 billion Euros of reissuance of capital.

A number of options remain open, but for some of them which have major difficulty to utilize the options of capitalization which the government have presented, we tell them, "If you are in such a situation, don't hesitate," and I take your question as, you know, permitting me to reshape that message that they have to do whatever is appropriate to reinforce their balance sheet.

Now there is also all -- precisely the question of abiding by the rules and the industry more or less in the dialogue that we have with them is more of saying, "Be very careful because if you are too demanding, then we would have problems for precisely the financing of the economy," and we are telling them, "Okay, we know that. We have to be sure that the system is resilient in permanent regime, that is an absolute obligation," and that's what must -- I think I was sufficiently clear on that.

As they said, we will see how to organize the position because, of course, we have to take account realities -- immediate realities today, but I think we have to be flexible on the long-term, permanent regime.

RUBIN: Yes, ma'am.

QUESTIONER: Lynn Forester de Rothschild, E.L. Rothschild. Could you tell us what you see as the biggest differences between the European and American views of financial regulatory reform?

TRICHET: (Laughs.) I think there is a unity of purpose, which is very big. And of course, we are in universe which structurally are very different. I mean, if I oversimplify, 75 percent of the financing of the real economy in Europe goes through the banking intermediation and I would say only 25 percent probably in the U.S. I mean, of course, it's an oversimplification, but it is important to have that in mind. And, of course, it creates an interface with the various part and parcel of global finance and particularly with the interface with the banking community, a substantial difference.

Another substantial difference which is also clear is that the model of banks in Europe is different. If I may, at least the very center of the bank's business model is different. The influence of investment banking is much stronger in the U.S. than is the case in Europe. And that also makes a number of differences in sensitivities and in the dialogue that we have with the industry.

I also already mentioned that the accounting rules are, for me, perhaps one of the major problems we have. Of course, it's understandable that, precisely because the business model is not the same, the dialogue with the accountants is not the same, but it is a big problem. We need, in my opinion, accounting rules that would be the same on both sides of the Atlantic at the level of the (globe ?), and it is not the case, and it is one of the areas where we have to work very actively.

If it were not the case when we applied the new rules, then we would have to conform a little bit the rules to take into account that we are not speaking of the same accounting concept on this side of the Atlantic. It would complicate formidably the application, the -- (inaudible) -- the implementation, the same rules at the global level and again, not only at the level of the industrialized countries.

At the level of the emerging world, as well, and I have to tell you, being myself an actor and a witness in all these discussions, they are in fact very good, very proficient, a lot of good ideas, and this intellectual ownership global industry that I was mentioning is there. Very, very impressive. And I mean, we again, we cannot be -- (inaudible) -- in our own discussion.

RUBIN: We'll go way back over there.

QUESTIONER: Thank you. Mahesh Kotecha. Mr. President, you said -- Structured Credit International. You said that the G -- the big change -- one of the big changes is that center of gravity for decisions on global governance has shifted to G-20. There is not much of kind of a secretariat or, you know, institutionalization of support for that kind of a dialogue. Do you see evolution of that? And if so, how?

TRICHET: Had I read my paper (laughs), I would have, of course, made a difference between the international financial institutions that are established by your treaty and where you have to improve governance and permit the emerging world to be progressively -- this is work in progress, more influential and would that make the difference with what I've called the informal -- (inaudible) -- like the G-7 or the G-12, now the G-20, that are absolutely decisive for permitting true converge, to make our legislation, our rules, our regulations which, some are covered by the international financial institutions, to be as converging as possible, and also the macro policies.

I would say that as regards the informal grouping, what has happened is, as I said, a revolution. It's absolutely fundamental what has happened. In the international financial institutions, it is work in progress. I have to say it's quite complicated, but it's work in progress, and I have no doubt that we would have an appropriate representation and a consensus to proceed. I am the witness and we are not ourselves directly participating in this negotiation.

RUBIN: I think we have time -- the Council has a tradition of always ending on time, so I think we have time for one more question, and the gentleman way in the -- maybe in the last row or thereabouts.

QUESTIONER: President Trichet, I am James Tunkey. Thank you for your thoughtful comments. Of the 27 percent of GDP commitments that have been made, what's your estimate in three years of the percent that will remain unrecovered and what do you believe to be the two obstacles to recovery? Thank you.

TRICHET: (Laughs.) I will not give you any figure. (Laughter.) But again, I will repeat what I have said. Had we not won, we would have lost an enormous amount of money. An enormous amount of money! Because in most European countries I look at, the loans that have been given at a certain moment are returned with the appropriate interest rate, so the governments can tell their people, "We made money out of this. We made money out of that."

I would say in a (large ?) number of cases the intervention in capital has also proved to be a winning intervention. And so, again, what strikes me is at the end of the day, in my opinion, it would be, depending on the country negative -- but not, of course, that big -- or slightly positive. That would probably be the result and, of course, in each democracy you would have to explain that and it would be, of course, certainly very difficult to explain why in some cases it is a negative result.

RUBIN: I think we have time for half a question.

TRICHET: Okay, you're right. You're right.

RUBIN: No, no, no, I didn't realize you hadn't finished. I apologize.

We have time for half a question more. I'm going to ask that question. Let me ask you this. (Laughter.) You just left the G-20 and when you meet with the, particularly the finance ministers, and they're obviously consumed with trying to work their way out of the current crisis.

I'll speak for myself. I look at these enormous fiscal imbalances, Jean-Claude, and they really are deeply, deeply troubling to me, and I think they pose an enormous risk, with the timing of that risk obviously being impossible to predict. Do you get a sense that that is getting sufficient weight as they think through their policy balances?

TRICHET: I think one of the difficulty they probably have is that not so long ago the global motto was "Spend as much as possible as rapidly as possible." I was never that happy with that motto. (Laughter.) I was always saying, as I said, you know, "Keep the sense of the long-term, medium long-term direction."

Of course, we have to do things that are extraordinary today, but let's keep a sense of the long-term sustainability of what we are doing. It is essential and on top of that, all countries are not alike, so a global motto is not necessarily appropriate even if we are in exceptional circumstances. It's the same for central banks. I don't like this when I hear, "All central banks should be accomodating as long as possible, and" -- no, central banks have to do what they have to do.

Some have all they need to increase rates. It is the case in Australia, for instance, and it should be obvious -- I mean, they should not follow a global motto. And I said what it was in our own case, and I trust that we do exactly what is appropriate, okay?

Again, it has to be filtered through the appropriate analysis, and what counts for us extremely (marginally ?) because it's also a help in times of very great difficulty. It is the anchoring of inflation expectations, (I explain ?).

RUBIN: Jean-Claude, we thank you. (Applause.) What this reminds me of is -- (applause). Thank you for your wonderful combination of thoughtfulness and charm. (Laughter.)

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THIS IS A RUSH TRANSCRIPT.

ROBERT E. RUBIN: Good afternoon.

I'm Bob Rubin and let me welcome you on behalf of the Council on Foreign Relations to today's meeting, with is part of the C. Peter McColough Series on International Economics.

And I was also asked to announce that the next meeting will be on May 7th and we will have the good fortune of having with us Wilhelm Buiter, who as you know, is at the London School of Economics and has recently joined Citigroup as its chief economist.

Please let me remind you to turn off your cell phones and various other assorted gadgets. And don't just put them on vibrate, because apparently they interfere with the sound system.

Also, this meeting will be on the record, and that will relate as well to the questions from the members.

It is an enormous honor for me today to introduce our speaker. And in keeping with council tradition, I will not recite from his resume -- you have it in your materials -- but I will make a few framing comments. Then after our speaker's remarks, he and I will chat for a moment or two and then we'll spend the predominate part of our time responding to your questions.

As we all know too well, for more than two years now, the United States and the global economy have been experiencing the worst financial and economic crisis since the 1930s. Many countries have responded -- I think, without doubt, appropriately -- with fiscal stimulus to face dramatic reductions in demand.

However, in many cases, that stimulus has been placed on top of already existing substantial structural fiscal deficits. And at this point, many of the major industrial economies are on unsustainable structural fiscal paths for the years and decades ahead. That in turn presents a new set of challenges to the global economy, while at the same time recovery still has a long way to go with its own uncertainties.

And to connect the economic framework with the subject of today's conversation, the conditions and policies in many economies -- with respect both to the crisis and to fiscal matters -- have had powerful effects on other countries around the globe. And that evidences just how interdependent the national economies or the global economy have become. Unfortunately the architecture of the global economy has lagged far behind these realities of interdependence.

I had the opportunity to work with our speaker as a member of the G7 finance ministers and central bank governors meetings in the 1990s. And he was clearly the visionary amongst us in recognizing our growing connectivity. And today, he is universally respected for his strong leadership on the imperatives for and the impediments to the transnational economic coordination that is so critically important to all of us.

So without further ado, we at the council are most fortunate and deeply honored to have as our guest speaker the president of the European Central Bank, Jean-Claude Trichet, to discuss with us his thoughts on global governance in the world of today and tomorrow.

Mr. President. (Applause.)

JEAN-CLAUDE TRICHET: Thank you. Thank you very much indeed for your invitation. I appreciate enormously to be here to meet friends -- a lot of friends. I have a memory of being introduced here by Bill McDonald, by Richard Haass and all. I would say, the presence of so many friends is rejoicing.

Of course, Bob, you were very, very frequently the able president of the G-7 and all kind of Gs. And I have the memory -- a very vivid memory of the way you were so ably chairing these meetings. You introduced something which did not exist, in my observation, in the G-7 before you, which was after very, very difficult meditation on the difficulty of the time. We had a dinner, which was totally open and where we were, you know, reflecting philosophically, if I may, and meditating on the time. And it was also extraordinarily interesting and stimulating. And I have to say that now that global governance is changing, perhaps we would miss a little bit this dinner chaired by Bob.

So again, thank you very much for having invited me.

I have a speech, which is public. You will have the speech. I know the whole of the game here is that questions and answers are very important. So I will compact the speech, if you permit, and elaborate on a number of messages that I trust are important at each stage, in order to be sure that I cover the main points without being too fastidious in my exposition.

First, I would take what you said, Bob, on this crisis. It was an unexpected crisis -- largely unexpected in its dimension and in its global nature -- even if it was clear that a number of academics; a number of central banks, I have to say; and also, a number of at his own institution very, very clearly -- the BIS -- had signaled that we were living in a world of general under appreciation of risks in the financial markets. And I have to say I was, myself, on record for having said that quite a time before the first turbulences erupted.

But that being said, what we have observed is really something which was very big -- bigger than was expected. And with a number of features that were really also unique.

In particular, I would note the fact that it was the first time we had really -- at the moment of the intensification of the crisis -- a global phenomenon where absolutely all economies, all sectors -- whether industrial or financial, corporate, non-corporate, emerging, industrialized -- we were all touched. And that it was, of course, something which we had not observed before. We had before phenomenon that were localized and mainly in the periphery of the, I would say, of global finance and not universally spread.

We also had something which for me was really extraordinary and was the first stress test, if I may, in real magnitude, unfortunately, of the new globalized world in which we are, which was the rapidity of the transmission of the shock.

After mid-September, the intensification of the crisis, it was really a question of half-days to measure the rapidity of the transmission -- and again, all over the world, all over different sectors. That is something which I never had observed before. I had, you know, the experience of a number of crises unfolding, but it was taking months, sometimes years, to see the dimension, the global dimension, or the continental damage the crisis will lead to expand and to materialize.

So there we had something which was, again, exceptional, not only in quantity but in nature, if I may. And we had to cope with this without any textbook telling us what we should have done or should do in real time. The central bank were left with their own judgment and their own capacity to appreciate the reality of the situation in a very short span of time.

Again, the non-conventional measures in which we engaged on both sides of the Atlantic and all over the world were not in any textbook, and we did things that were not easy to decide upon, I have to say. We had this experience of very big decisions having -- calling on us, a lot of judgment in a few hours.

Of course, we were mentally prepared. Of course, we had the feeling since a certain period of time that something was looming. But in August '07, when we saw that we had something very big which was there, we had to decide or not to engage in. And what we finally decided -- namely, full allotment, fixed-rate operation, which turned out to be 90 billion Euros -- you might remember that it was a shock, of course, all over the world to see that something was calling for such a big response.

So, again, this crisis has, in many aspects, called on all of us an enormous amount of rapidity in the decision, imagination and boldness in the nature of the decisions, and have to say also courage, because it's not that easy to take those decisions.

For the governments, for the executive branches, I have to say it was the same. It was the same. They had to step in. And I have computed with my colleagues in the ECB what the overall options that had been decided by the various governments, whether in the form of recapitalization, in the form of guarantees of all kinds, in the form of toxic assets help, if I might.

And I arrived to the figure of 27 percent of the GDP. When I add everything, of course, a very, very large part of this taxpayer risk has not been utilized at all, very fortunately. The part which has been utilized, because we won against the crisis, turned out to be a profit and not a loss. And that is, of course, extremely fortunate.

And unfortunately, part of it became losses because we had, on both sides of the Atlantic, had to cope with a situation which were, at the individual level, really desperate.

But the fact is that we put on the table, on both sides of the Atlantic, something on the order of 27 percent of the GDP of taxpayer risk. And that, of course, is another way of looking both at the dimension of what we had to cope with and the courage and the determination of governments, executive branches and parliaments, in such exceptional circumstances.

This drives me to the consideration that it is an obligation for all of us -- and I'm speaking for the public sector, of course, but also for the private sector -- all of us to do whatever we can to put the system not only back on its feet, but in a situation which would be much more resilient, because I take it that if we had, under more or less the same circumstances, to cope with the same kind of challenge, I'm not sure at all that we could do what we have done, obviously; namely, take the set of decisions that have permitted to avoid the great depression and retake -- regain control on this dramatic succession of events and have, finally, the recovery which we have at the global level in front of us.

I take it that the probability that some of the decisions would not be taken, because it was really a close call at certain moments. I take it also that the probability for democracies -- and I'm speaking for all democracies -- to redo what they have done is also bigger. That's my perception. And again, then if we are not doing the job -- and I'm speaking both for the public sector and the private sector -- if we are not doing the job to put global finance and the global economy, by way of consequence, in a much more resilient situation, we could, again, not avoid a dramatic depression.

So there is, again -- I insist on that -- it seems to me, an obligation of result, if I may. And it is what we trust in the present prime grouping for global governance, which is the G-20 at the present moment. And there, I am at the heart of the meditation you asked me to embark on, Bob.

I think one of the most important features of the present world is that we had an historical change of global governance, an historical change which had been prepared when you were yourself the head of this very important administration in the United States, with the creation, in the occasion of the Asian crisis, of the G-20, which was not the prime grouping for global governance, but was a very important grouping, obviously, particularly for the working out of standards and codes and rules and regulations. But the prime grouping for global governance was, at the time, the G-7.

So the core, if I may, of the industrialized world in terms of dimension was clearly the heart of global governance, at least in its dimension, which is the informal grouping. And I see there France that -- we are the heart of the preparation of this global governance in various G-7 at the level of heads.

All that being said, we have now shifted the battle. The battle is not now in the hands of the industrialized world. The battle is in the hands of a grouping of countries which comprise the industrialized core countries and the emerging economies.

And one of the indivisible events which was in the succession of events in Washington last days was that there was no G-7 communique and there was no G-7 briefing. The communique and the briefings were the G-20.

So again, this is at the level of global governance, something which I trust is of utmost importance. And I would say that we owe this transformation -- which, again, has been prepared; it is something which didn't come as a shock and, I would say, unexpected event, because the G-20 existed already. But this shift from the G-7 to the G-20, we (owe it ?), it seems to me, obviously, because it was overdue that these economies that were obviously systemic at the global level would have a full ownership of this global governance at the level of this informal grouping that I mentioned. And that's of course something which appears absolutely obvious.

I trust also that there is a second reason. Perhaps the industrialized country proved that they were quite clumsy themselves in running their own economy, which were -- and remain, of course, at the core of global finance and of the global economy, and that is something that we have to take fully into account. And it's -- (inaudible) -- upon the industrialized country to be themselves fully conscious of the fact that they have their full role to play in the G-20 because they remain fully responsible for a large part of the core of global finance and of the global economy.

And again, I said already that, in my opinion, we could not afford a second time to have to cope with the challenge that were dramatically erupting a few years ago. But it would be particularly -- I have to say, for the industrialized world, particularly dramatic if it proved that it was impossible himself participating fully in the G-20 to regain control of this evolutions.

Let me say a word on something which has happened also quite invisibly, but in front of eminent central bankers. I cannot help mentioning also that in the cooperation between central banks we had large, very large ownership -- which has been prepared by the creation of the global economy meeting in Basel, by the full participation of a large number, a very large number of central banks in our discussions in the preparation, in the, I would say, orientations that we were giving to a number of committees that are not very visible but very important at a global level.

But there also we had shifted the prime grouping for governance at the level of central banks. It is now another G-10 who is the prime grouping for governance of central banks. It is the global economy meeting which again comprehends a large group of central banks of the industrialized world and of the emerging countries. And this is something which, of course, is parallel to what has been done at the level of the ministers, and governors, and at the level of heads, and which is also illustrating to which extent, at the moment of these crises -- which, again, in its quantity and quality, if I may, is so dramatic, is coinciding with a very, very important and dramatic change of global governance.

Now, I don't want to elaborate on how we fared during the crisis. I don't want to elaborate more on the G-20 or on what goes with the much, I would say, larger ownership of global governance at the level of the central banks. I already mentioned that we had changed the system of governance of central bank operation. But we have the Financial Stability Board -- which was also anticipated at the moment of the Asian crisis, Bob, the Financial Stability Forum, which has been reinforced, given a mandate which is enlarged, and which is much more inclusive. At the time it was a G-7 grouping, and it is now, again, more or less incorporating, in various forms, this global new ownership of governance.

Now, let me perhaps conclude. You gave me, very generously, a quarter of a hour. Let me conclude to mention a number of -- a small number of points, which seems to me very, very important at the global level, on rules and regulations on the one hand, and on the overall mutual assessment of the macro-policies of the members of the G-20.

I trust these are the two sides of the coin: If we want to be as sure as possible that we make the world a much more resilient entity -- the global finance and the global economy, we have to be as active as possible in being sure that all the new rules, regulations, standards and codes that we are working on, and in all the dimension of global finance, would be, I would say, well-prepared and as optimum as possible, and we have also to care for the macro policies.

On the first side of the coin, I would say it is of utmost importance that the new Basel rules that we are preparing, and we are in an intense phase of discussion after having had the input of the industry -- the industry was in dialogue with the Basel committee, we have this industry response and now we have to engage in calibration, and a calibration exercise which is, of course, of utmost importance. And we have to engage in the impact studies to see exactly how to optimize the new rules, particularly in terms of capital requirements, in terms of liquidity monitoring, and all what is the core of the new banking supervision. And I'm speaking under the control of -- (inaudible) -- who knows that better than anybody.

But what I would insist on is that it is extremely important that we have really a level playing field, that we have really, at the global level, the same rules being applied by all. This is very, very important, in my understanding. Of course, for the good and appropriate functioning of global finance, it is extremely important that we, in this new ownership of global governance, have, particularly on both sides of the Atlantic, the implementation of the same rules in the same fashion; not to create the sentiment between us, on both sides of the Atlantic, that we are not in the same universe, which would be a -- would be a very big mistake. And also, with all the friends that are coming from the emerging world, not to give the abominable example, then after having created the G-20 as the prime grouping for global governance, we are clumsy enough to have difference of views and not appropriate implementation on both sides of the Atlantic.

This is true for the -- it's true for absolutely everything, of course, for the Basel rules I would say also, of course. But I know that it is delicate for the accounting rules; we cannot afford to have different rules -- significantly different rules on both sides of the Atlantic and at the global level, with the ISB on the one hand and the FSB at the other hand. This is also something which has to be fixed. It is extremely important.

And I could give another set of such examples. They are areas where it is really very important that the core standards, the core principles are applied in the same fashion. Of course, there can be some differences on a country-to-country basis, but, again, we have to be very, very clear on this element which is key, in my opinion: the level playing field at the global level. I could elaborate more on that.

The questions perhaps will permit to explore more, because as you know, we are not only dealing with the banks themselves; it is the full body of the system which is at stake -- the non-banks, the markets, the transparency; the principle of having much more transparency; much less short-termism if possible -- I know how difficult it is; and much less pro-cyclicality than we had in the previous system. These are the main avenues, but it has to be applied in all part and parcel of global finance.

(Inaudible) -- that it is the conclusion on the other side of the coin, which is the appropriate surveillance at the level of the systemic economies of the world of the whole macro policy, to be sure that we are not permanently creating, paving the way for major difficulty because the constellation of imbalances would be such that we would know that at times we would have a sharp and abrupt correction.

And that, of course, is something which is extremely important which has been already tried in the past, I have to say with the multilateral surveillance. But very sullenly the 20 have decided to embark into this new kind of concept of mutual assessment of their own policies, helped by the IMF, but with an element of peer surveillance. And there it seems to me, the stakes are extremely high.

We knew the difficulty. We knew the enormous difficulty in a world where the global economy or global finance are now the pertinent entity. We had the demonstration that it was the pertinent entity. At the same time we have no global government, we have no global executive branch and no global parliament. So we have to coordinate appropriately our various decision-making processes for those decision-making processes to internalize the externality that is associated with their own decision at the global level. And of course, I'm speaking in front of the citizens of a very, very great democracy.

The tendency of our democracy is to be inward looking and I know that myself very, very well. There is an irrepressible tendency to be inward looking. What we need is exactly the contrary. We need to be sufficiently looking abroad to understand exactly that the optimum is not necessarily the suboptimum at the level of this particular economy and country -- and I'm not speaking, of course, particularly of the U.S., I'm speaking of all the participants -- but that it is something which has to be replaced in the context of a larger optimization at the global level.

We are all cold now, and that's the reason why, I think that the communication and explanation, tireless explanation of -- on the real world, in which we are, is necessary because our political leaders are depending -- the democracy, this is very reassuring -- on their own people. And if their own people understand, in general who they are, the task of course of the leaders is considerably simplified. If communication is poor, explanation is poor, and I'm thinking not only of course what is being done by the leaders themselves but by all the communication channels that exist in our societies. If that job is not done correctly then we complicate formidably what I call the second side of the coin.

So I see that I was perhaps a little bit too long, Bob, but I think that it's about time to sit down now. Thank you. (Applause.)

RUBIN: Jean-Claude, you were terrific. Let me just ask a couple of questions and then we will open the questions to the members.

I guess question one really goes to the last point that you were on. If you look across the industrial democracies, I think almost -- well, with the exception I guess of Germany basically, maybe to some extent your own country, France -- you see these enormous structural deficits and at the same time we've paced, and very often extended monetary positions -- central bank positions as well, certainly the United States with our quantitative -- (inaudible).

At the same time we have very high levels of unemployment and very slow economies. So you talked about getting back to a position where we reduced our structural deficits and our central banks put themselves in a position so we could be resilient again. How are we going to resolve the conflicting imperatives that both dealing with our short-term situation, which is very difficult, and our structural physical situation which is equally difficult and in a longer-term sense deeply threatening?

TRICHET: I think you're absolutely right that the balancing act is certainly very demanding. Now we have always said ourselves, even when we were close to the heat of the crisis, that in any case you have to do what was necessary on a short-term basis because you were in the situation which was extremely demanding -- it was true for the central banks, it was true for the government -- that at the same time one should never lose the medium, long-term perspective because if at any moment the medium, long-term perspective is considered to be put totally out of, I would say, sound concept, a sustainable concept, then it would play immediately against what is done in the short term through the -- (inaudible).

If our households, if the entrepreneurs if all the, I would say, markets are losing faith in the capacity to be sustainable in the long run, the mark of the present functioning of the economy is that then they lose confidence immediately and it goes against what is probably the goal, they need to help the recovery as where as possible. So one has always to take the appropriate decision on a short-term basis when, you know, situation is extraordinarily demanding, and not lose the long-term prospective.

And we always said ourselves that it is indispensable in our fiscal policies because, it was really your question, to be sure that in any case whatever is done, there is a going back to a sustainable position. I think that this is something that goes without saying normally, but of course in the heat of these dramatic events, that could have been forgotten. But now we are in a situation where nobody can dispute that every entity at the global level has to work out an appropriate medium, long-term recovery program for, I would say, public finance. And it seems to me that it's true in the industry as well. I have to say that in the emerging world we are in a different universe, we are in a different universe. They had their problem before, they had to go through the abominable crisis in Latin America and in Asia, but they learned the lesson the hard way and they are not in such a venerable situation.

RUBIN: You know, it's interesting, Jean-Claude, you reminded me of something. In 1993, when President Clinton put in place the Deficit Reduction Program, one of the comments he made, and I think it goes to this very point you just made about whether we can afford to let the fiscal imbalances -- whether we can afford to put that question off for a while -- he said that once -- at least it was his view -- that once he put in place the Debt Reduction Program that enormous positive feedback effects on confidence in the short term. And that he also felt that had he not done so that there might have been a more general lack of confidence -- the very point you made, which I think is a very good point.

Let me ask you this, Jean-Claude as a second question. You referred to surveillance and I believe you referred to internalizing externalities, which I think is a very good way to put it. You've lived the realities of the politics of trying to coordinate economic policy for a long time.

Do you think there's any realistic likelihood that we will figure out some way of creating mechanisms that will cause for example, the United States Congress to decide that it needs to look not only at its own country and doing what it thinks makes sense here, itself not an inconsiderable issue, but also, as you said, the externalities in terms of effects elsewhere or similarly the Chinese government looking at their exchange rate or the difference between export-led model and domestic demand grown model, and considering not only the internal effects but the external effects.

Other than more -- is there mechanism that you can foresee that would trade away some sovereignty so that we would have something more than just moral persuasion. And if not, what does that leave us with in an evermore-interconnecting global economy. These are the meditations we used to have at dinner, remember?

TRICHET: (Chuckles.) Yeah, exactly. That could have been one of your dinner main points.

First of all, it seems to me that it is exactly the heart of the main challenge. We have a global economy, which is the pertinent entity -- not only global financing -- it is a pertinent entity. We could see that we were so interconnected that again a single event could exert its own influence immediately all over the planet in a question of a half day. So that is a fact. It is also a fact that the various economies concerned are spontaneously, formidably inward looking. That's a fact.

My suggestion was that we had to make our own people -- I was speaking of democracies -- China has its own way to manage itself. But I fully agree with you of course that there is exactly the same problem there -- how to assure that you internalize the -- (inaudible). This is a -- (inaudible). It means how we make our own decision making processes in our democracies, our own people fully aware of the fact that they have to accept that the global stability and prosperity is essential as a precondition for their own domestic stability and prosperity.

Again, enlightenment of all. But I think very often, we put the blame on the politicians, if I may. But it seems to me -- it seems the full body of the society which is at stake, all those who knew should speak more in my understanding. All those who know should speak more. It is certainly a case of the -- of the real economy responsible persons of all opinion leaders.

Now, don't be shy. Don't be timid. Explain in which universe we really are. And I know of course much better Europe than the United States. What strikes me is that it's much more easy in a small economy, which is by definition very, very internalized because they are so small. So the people knows that what the rest of the world is doing is extremely important.

The bigger you are in an economy and the more -- the stronger is the culture of that economy predicting from external communication, of course, the more you have a difficult problem. And I will not be surprised in the biggest of the industrialized economy has a particular problem in this respect. But we have shown exactly the same phenomenon in Europe, I have to say.

RUBIN: I think of the -- well first, that was a very thoughtful response, and these were the kind of conversations we used to have. And secondly, I think it -- I'd just make the point that the world is complicated.

Why don't we now take questions from the members. Is there is anybody who does not perfectly understand the world, Jean Claude will provide you with wisdom.

Yes, sir. State who you are and briefly state one question, okay.

QUESTIONER: Kevin Harrington from Clarium Capital. In 2006 to 2008, the ECBU was one of the central banks that expressed a concern about the effect of oil prices on the movements of capital markets. And that in part led to your raising rates in July 2008, in spite of the economic slowdown that was developing at that time.

We're now faced with oil-back at 85 (dollars), but the money supply in Europe contracting. How do you balance those two as a central bank? Where does oil price -- where do oil prices have to go before one would switch away from a hyper-stimulus state to something else?

RUBIN: You can tell who runs a trading operation. (Laughter.)

TRICHET: First of all, as you know, we have a monetary policy concept which is based on two-payer strategy. But the objective is to deliver price stability in line with our definition, which is quite simple. We are very candid in giving the definition of price stability -- the yardstick to judge what we are doing. And of course, also we are candid in trying to anchor as well as possible in social expectations.

What we did at the period you have mentioned, we did it because there was the start of what we considered dangerous, the sentiment because we had a number of negotiations which were taking place. And we could see that the working assumption that price -- that the inflation in the medium term could be different from the definition of price stability was gaining in -- (inaudible). So that we were -- we had the threat of this unincurring of inflation expectations, which were before very well anchored.

And we took that decision to show our determination to solidly anchor expectation, and the need to deliver in the medium term -- in the medium long term our definition of price stability. It proved useful in the immediate I would say days or months which followed, because we could see that the negotiations were taking a different mode. Then of course, we had the -- what I call the intensification of the crisis.

And I have to say that in the intensification of the crisis, the fact that we had very solidly anchored inflation expectations helped us. We were never at -- below zero in terms of future inflation. So there was no materialization in the mind of the market participants and observers. And -- (inaudible) -- no materialization of the deflationary risks, which for us was a formidable help in the circumstances.

And now, what we are looking at is of course the multiple dimensions in which we operate. We consider that there is correct anchoring of inflation expectations. We see that -- we consider that, that for the present moment, we have inflation under control. And that the reason why, I have said that on behalf of the governing council, that the present interest rate were for us appropriate.

But that doesn't mean anything but it is our judgment today. I don't want to anticipate in any respect future decisions. You know that we have the theory according to which we are not pre-committed. We do always what we judge appropriate to deliver price stability in the medium term. And we are not the prisoner of promise or of a mechanism.

Now, you will tell me -- do you indeed deliver price stability according to your definition? And I would say, of course it depends on some -- of the price of oil, as you have said. But since the 1st of January '99, to the end of this year, I expect that the average yearly inflation would have been probably something like 1.95 percent. So our (definition ?) being less than two, close to two, it would not be that bad in terms of confirming that the -- (inaudible) is in line with the yardstick that we gave at the very beginning.

RUBIN: Yes, sir.

QUESTIONER: John Brademas. Sir, I am the first Greek-American elected to the Congress of the United States. And that's the background of my question. (Laughter.)

RUBIN: But you want to ask about France? (Laughter.)

QUESTIONER: What do you see in respect to the Greek situation? I yield back the balance of my time. (Laughter.)

TRICHET: I would -- you know that negotiations are taking place in Athens. And I would not comment because negotiations are taking place. I'm confident that they will be concluded soon and rightly. They are led by the IMF, by the commission and we are present also. I have a number of experts that are in liaison with the commission and are on the spot.

RUBIN: Henry.

QUESTIONER: Mr. President, I'd like to ask you a question concerning your major financial institutions in Europe. To what extent is their capital adequate today? To what extent do they still currently have major toxic assets? And to what extent are they capable to coming back as active lenders and investors?

TRICHET: Very important question of course. You know that the European economy -- actually the -- (inaudible) -- economy, -- (inaudible) -- the case for her all over Europe, the 27th, is massively financed by the banks, and not by the markets. So it has been the main difference between both sides of the Atlantic. And also, it explains why our non-conventional measures in Europe or in the ECB were different from the non-conventional measures taken in the U.S.

At the moment I'm speaking, we have observed I would say slight decrease in the rough figures we have of the outstanding credit with increase of the outstanding credit to households, in my memory over 12 months by 1.8 percent, and a decrease of the outstanding credit to the corporate by minus 2.5 percent or something.

Of course, in the U.S. where the financing goes massively through markets, I have seen diminution of credit outstanding by banks that were much richer, more impressive, if I may, in the negative figures, but it cannot be compared. It should not be compared because of the difference of structure.

That being said, I have to say that after the recession we had, it is normally -- our own observations over the previous cycle to see that the loans to households are picking up before the loans to corporate, so we had a decrease of both. Then we see now that loans to households are more dynamic, and it is always what we had observed.

That being said, we are calling our banks to do whatever is possible, of course, to reinforce their balance sheet, to reinforce their capacity to do their job, which is to finance the real economy and we are very, very active in that. We are telling them that we certainly did not embark into these very bold -- non-standard measures only for their own pleasure, that we were doing that exclusively to permit the appropriate financing of the real economy in circumstances which were particularly difficult.

We are very, very strong on that and our message is very strong. The magnitude of the issuance of new equity that we have observed in the (EU ?) here since the crisis, the start of the troubles and, of course, it started a little bit later than in the U.S., but is around 200 billion Euros of reissuance of capital.

A number of options remain open, but for some of them which have major difficulty to utilize the options of capitalization which the government have presented, we tell them, "If you are in such a situation, don't hesitate," and I take your question as, you know, permitting me to reshape that message that they have to do whatever is appropriate to reinforce their balance sheet.

Now there is also all -- precisely the question of abiding by the rules and the industry more or less in the dialogue that we have with them is more of saying, "Be very careful because if you are too demanding, then we would have problems for precisely the financing of the economy," and we are telling them, "Okay, we know that. We have to be sure that the system is resilient in permanent regime, that is an absolute obligation," and that's what must -- I think I was sufficiently clear on that.

As they said, we will see how to organize the position because, of course, we have to take account realities -- immediate realities today, but I think we have to be flexible on the long-term, permanent regime.

RUBIN: Yes, ma'am.

QUESTIONER: Lynn Forester de Rothschild, E.L. Rothschild. Could you tell us what you see as the biggest differences between the European and American views of financial regulatory reform?

TRICHET: (Laughs.) I think there is a unity of purpose, which is very big. And of course, we are in universe which structurally are very different. I mean, if I oversimplify, 75 percent of the financing of the real economy in Europe goes through the banking intermediation and I would say only 25 percent probably in the U.S. I mean, of course, it's an oversimplification, but it is important to have that in mind. And, of course, it creates an interface with the various part and parcel of global finance and particularly with the interface with the banking community, a substantial difference.

Another substantial difference which is also clear is that the model of banks in Europe is different. If I may, at least the very center of the bank's business model is different. The influence of investment banking is much stronger in the U.S. than is the case in Europe. And that also makes a number of differences in sensitivities and in the dialogue that we have with the industry.

I also already mentioned that the accounting rules are, for me, perhaps one of the major problems we have. Of course, it's understandable that, precisely because the business model is not the same, the dialogue with the accountants is not the same, but it is a big problem. We need, in my opinion, accounting rules that would be the same on both sides of the Atlantic at the level of the (globe ?), and it is not the case, and it is one of the areas where we have to work very actively.

If it were not the case when we applied the new rules, then we would have to conform a little bit the rules to take into account that we are not speaking of the same accounting concept on this side of the Atlantic. It would complicate formidably the application, the -- (inaudible) -- the implementation, the same rules at the global level and again, not only at the level of the industrialized countries.

At the level of the emerging world, as well, and I have to tell you, being myself an actor and a witness in all these discussions, they are in fact very good, very proficient, a lot of good ideas, and this intellectual ownership global industry that I was mentioning is there. Very, very impressive. And I mean, we again, we cannot be -- (inaudible) -- in our own discussion.

RUBIN: We'll go way back over there.

QUESTIONER: Thank you. Mahesh Kotecha. Mr. President, you said -- Structured Credit International. You said that the G -- the big change -- one of the big changes is that center of gravity for decisions on global governance has shifted to G-20. There is not much of kind of a secretariat or, you know, institutionalization of support for that kind of a dialogue. Do you see evolution of that? And if so, how?

TRICHET: Had I read my paper (laughs), I would have, of course, made a difference between the international financial institutions that are established by your treaty and where you have to improve governance and permit the emerging world to be progressively -- this is work in progress, more influential and would that make the difference with what I've called the informal -- (inaudible) -- like the G-7 or the G-12, now the G-20, that are absolutely decisive for permitting true converge, to make our legislation, our rules, our regulations which, some are covered by the international financial institutions, to be as converging as possible, and also the macro policies.

I would say that as regards the informal grouping, what has happened is, as I said, a revolution. It's absolutely fundamental what has happened. In the international financial institutions, it is work in progress. I have to say it's quite complicated, but it's work in progress, and I have no doubt that we would have an appropriate representation and a consensus to proceed. I am the witness and we are not ourselves directly participating in this negotiation.

RUBIN: I think we have time -- the Council has a tradition of always ending on time, so I think we have time for one more question, and the gentleman way in the -- maybe in the last row or thereabouts.

QUESTIONER: President Trichet, I am James Tunkey. Thank you for your thoughtful comments. Of the 27 percent of GDP commitments that have been made, what's your estimate in three years of the percent that will remain unrecovered and what do you believe to be the two obstacles to recovery? Thank you.

TRICHET: (Laughs.) I will not give you any figure. (Laughter.) But again, I will repeat what I have said. Had we not won, we would have lost an enormous amount of money. An enormous amount of money! Because in most European countries I look at, the loans that have been given at a certain moment are returned with the appropriate interest rate, so the governments can tell their people, "We made money out of this. We made money out of that."

I would say in a (large ?) number of cases the intervention in capital has also proved to be a winning intervention. And so, again, what strikes me is at the end of the day, in my opinion, it would be, depending on the country negative -- but not, of course, that big -- or slightly positive. That would probably be the result and, of course, in each democracy you would have to explain that and it would be, of course, certainly very difficult to explain why in some cases it is a negative result.

RUBIN: I think we have time for half a question.

TRICHET: Okay, you're right. You're right.

RUBIN: No, no, no, I didn't realize you hadn't finished. I apologize.

We have time for half a question more. I'm going to ask that question. Let me ask you this. (Laughter.) You just left the G-20 and when you meet with the, particularly the finance ministers, and they're obviously consumed with trying to work their way out of the current crisis.

I'll speak for myself. I look at these enormous fiscal imbalances, Jean-Claude, and they really are deeply, deeply troubling to me, and I think they pose an enormous risk, with the timing of that risk obviously being impossible to predict. Do you get a sense that that is getting sufficient weight as they think through their policy balances?

TRICHET: I think one of the difficulty they probably have is that not so long ago the global motto was "Spend as much as possible as rapidly as possible." I was never that happy with that motto. (Laughter.) I was always saying, as I said, you know, "Keep the sense of the long-term, medium long-term direction."

Of course, we have to do things that are extraordinary today, but let's keep a sense of the long-term sustainability of what we are doing. It is essential and on top of that, all countries are not alike, so a global motto is not necessarily appropriate even if we are in exceptional circumstances. It's the same for central banks. I don't like this when I hear, "All central banks should be accomodating as long as possible, and" -- no, central banks have to do what they have to do.

Some have all they need to increase rates. It is the case in Australia, for instance, and it should be obvious -- I mean, they should not follow a global motto. And I said what it was in our own case, and I trust that we do exactly what is appropriate, okay?

Again, it has to be filtered through the appropriate analysis, and what counts for us extremely (marginally ?) because it's also a help in times of very great difficulty. It is the anchoring of inflation expectations, (I explain ?).

RUBIN: Jean-Claude, we thank you. (Applause.) What this reminds me of is -- (applause). Thank you for your wonderful combination of thoughtfulness and charm. (Laughter.)

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THIS IS A RUSH TRANSCRIPT.

ROBERT E. RUBIN: Good afternoon.

I'm Bob Rubin and let me welcome you on behalf of the Council on Foreign Relations to today's meeting, with is part of the C. Peter McColough Series on International Economics.

And I was also asked to announce that the next meeting will be on May 7th and we will have the good fortune of having with us Wilhelm Buiter, who as you know, is at the London School of Economics and has recently joined Citigroup as its chief economist.

Please let me remind you to turn off your cell phones and various other assorted gadgets. And don't just put them on vibrate, because apparently they interfere with the sound system.

Also, this meeting will be on the record, and that will relate as well to the questions from the members.

It is an enormous honor for me today to introduce our speaker. And in keeping with council tradition, I will not recite from his resume -- you have it in your materials -- but I will make a few framing comments. Then after our speaker's remarks, he and I will chat for a moment or two and then we'll spend the predominate part of our time responding to your questions.

As we all know too well, for more than two years now, the United States and the global economy have been experiencing the worst financial and economic crisis since the 1930s. Many countries have responded -- I think, without doubt, appropriately -- with fiscal stimulus to face dramatic reductions in demand.

However, in many cases, that stimulus has been placed on top of already existing substantial structural fiscal deficits. And at this point, many of the major industrial economies are on unsustainable structural fiscal paths for the years and decades ahead. That in turn presents a new set of challenges to the global economy, while at the same time recovery still has a long way to go with its own uncertainties.

And to connect the economic framework with the subject of today's conversation, the conditions and policies in many economies -- with respect both to the crisis and to fiscal matters -- have had powerful effects on other countries around the globe. And that evidences just how interdependent the national economies or the global economy have become. Unfortunately the architecture of the global economy has lagged far behind these realities of interdependence.

I had the opportunity to work with our speaker as a member of the G7 finance ministers and central bank governors meetings in the 1990s. And he was clearly the visionary amongst us in recognizing our growing connectivity. And today, he is universally respected for his strong leadership on the imperatives for and the impediments to the transnational economic coordination that is so critically important to all of us.

So without further ado, we at the council are most fortunate and deeply honored to have as our guest speaker the president of the European Central Bank, Jean-Claude Trichet, to discuss with us his thoughts on global governance in the world of today and tomorrow.

Mr. President. (Applause.)

JEAN-CLAUDE TRICHET: Thank you. Thank you very much indeed for your invitation. I appreciate enormously to be here to meet friends -- a lot of friends. I have a memory of being introduced here by Bill McDonald, by Richard Haass and all. I would say, the presence of so many friends is rejoicing.

Of course, Bob, you were very, very frequently the able president of the G-7 and all kind of Gs. And I have the memory -- a very vivid memory of the way you were so ably chairing these meetings. You introduced something which did not exist, in my observation, in the G-7 before you, which was after very, very difficult meditation on the difficulty of the time. We had a dinner, which was totally open and where we were, you know, reflecting philosophically, if I may, and meditating on the time. And it was also extraordinarily interesting and stimulating. And I have to say that now that global governance is changing, perhaps we would miss a little bit this dinner chaired by Bob.

So again, thank you very much for having invited me.

I have a speech, which is public. You will have the speech. I know the whole of the game here is that questions and answers are very important. So I will compact the speech, if you permit, and elaborate on a number of messages that I trust are important at each stage, in order to be sure that I cover the main points without being too fastidious in my exposition.

First, I would take what you said, Bob, on this crisis. It was an unexpected crisis -- largely unexpected in its dimension and in its global nature -- even if it was clear that a number of academics; a number of central banks, I have to say; and also, a number of at his own institution very, very clearly -- the BIS -- had signaled that we were living in a world of general under appreciation of risks in the financial markets. And I have to say I was, myself, on record for having said that quite a time before the first turbulences erupted.

But that being said, what we have observed is really something which was very big -- bigger than was expected. And with a number of features that were really also unique.

In particular, I would note the fact that it was the first time we had really -- at the moment of the intensification of the crisis -- a global phenomenon where absolutely all economies, all sectors -- whether industrial or financial, corporate, non-corporate, emerging, industrialized -- we were all touched. And that it was, of course, something which we had not observed before. We had before phenomenon that were localized and mainly in the periphery of the, I would say, of global finance and not universally spread.

We also had something which for me was really extraordinary and was the first stress test, if I may, in real magnitude, unfortunately, of the new globalized world in which we are, which was the rapidity of the transmission of the shock.

After mid-September, the intensification of the crisis, it was really a question of half-days to measure the rapidity of the transmission -- and again, all over the world, all over different sectors. That is something which I never had observed before. I had, you know, the experience of a number of crises unfolding, but it was taking months, sometimes years, to see the dimension, the global dimension, or the continental damage the crisis will lead to expand and to materialize.

So there we had something which was, again, exceptional, not only in quantity but in nature, if I may. And we had to cope with this without any textbook telling us what we should have done or should do in real time. The central bank were left with their own judgment and their own capacity to appreciate the reality of the situation in a very short span of time.

Again, the non-conventional measures in which we engaged on both sides of the Atlantic and all over the world were not in any textbook, and we did things that were not easy to decide upon, I have to say. We had this experience of very big decisions having -- calling on us, a lot of judgment in a few hours.

Of course, we were mentally prepared. Of course, we had the feeling since a certain period of time that something was looming. But in August '07, when we saw that we had something very big which was there, we had to decide or not to engage in. And what we finally decided -- namely, full allotment, fixed-rate operation, which turned out to be 90 billion Euros -- you might remember that it was a shock, of course, all over the world to see that something was calling for such a big response.

So, again, this crisis has, in many aspects, called on all of us an enormous amount of rapidity in the decision, imagination and boldness in the nature of the decisions, and have to say also courage, because it's not that easy to take those decisions.

For the governments, for the executive branches, I have to say it was the same. It was the same. They had to step in. And I have computed with my colleagues in the ECB what the overall options that had been decided by the various governments, whether in the form of recapitalization, in the form of guarantees of all kinds, in the form of toxic assets help, if I might.

And I arrived to the figure of 27 percent of the GDP. When I add everything, of course, a very, very large part of this taxpayer risk has not been utilized at all, very fortunately. The part which has been utilized, because we won against the crisis, turned out to be a profit and not a loss. And that is, of course, extremely fortunate.

And unfortunately, part of it became losses because we had, on both sides of the Atlantic, had to cope with a situation which were, at the individual level, really desperate.

But the fact is that we put on the table, on both sides of the Atlantic, something on the order of 27 percent of the GDP of taxpayer risk. And that, of course, is another way of looking both at the dimension of what we had to cope with and the courage and the determination of governments, executive branches and parliaments, in such exceptional circumstances.

This drives me to the consideration that it is an obligation for all of us -- and I'm speaking for the public sector, of course, but also for the private sector -- all of us to do whatever we can to put the system not only back on its feet, but in a situation which would be much more resilient, because I take it that if we had, under more or less the same circumstances, to cope with the same kind of challenge, I'm not sure at all that we could do what we have done, obviously; namely, take the set of decisions that have permitted to avoid the great depression and retake -- regain control on this dramatic succession of events and have, finally, the recovery which we have at the global level in front of us.

I take it that the probability that some of the decisions would not be taken, because it was really a close call at certain moments. I take it also that the probability for democracies -- and I'm speaking for all democracies -- to redo what they have done is also bigger. That's my perception. And again, then if we are not doing the job -- and I'm speaking both for the public sector and the private sector -- if we are not doing the job to put global finance and the global economy, by way of consequence, in a much more resilient situation, we could, again, not avoid a dramatic depression.

So there is, again -- I insist on that -- it seems to me, an obligation of result, if I may. And it is what we trust in the present prime grouping for global governance, which is the G-20 at the present moment. And there, I am at the heart of the meditation you asked me to embark on, Bob.

I think one of the most important features of the present world is that we had an historical change of global governance, an historical change which had been prepared when you were yourself the head of this very important administration in the United States, with the creation, in the occasion of the Asian crisis, of the G-20, which was not the prime grouping for global governance, but was a very important grouping, obviously, particularly for the working out of standards and codes and rules and regulations. But the prime grouping for global governance was, at the time, the G-7.

So the core, if I may, of the industrialized world in terms of dimension was clearly the heart of global governance, at least in its dimension, which is the informal grouping. And I see there France that -- we are the heart of the preparation of this global governance in various G-7 at the level of heads.

All that being said, we have now shifted the battle. The battle is not now in the hands of the industrialized world. The battle is in the hands of a grouping of countries which comprise the industrialized core countries and the emerging economies.

And one of the indivisible events which was in the succession of events in Washington last days was that there was no G-7 communique and there was no G-7 briefing. The communique and the briefings were the G-20.

So again, this is at the level of global governance, something which I trust is of utmost importance. And I would say that we owe this transformation -- which, again, has been prepared; it is something which didn't come as a shock and, I would say, unexpected event, because the G-20 existed already. But this shift from the G-7 to the G-20, we (owe it ?), it seems to me, obviously, because it was overdue that these economies that were obviously systemic at the global level would have a full ownership of this global governance at the level of this informal grouping that I mentioned. And that's of course something which appears absolutely obvious.

I trust also that there is a second reason. Perhaps the industrialized country proved that they were quite clumsy themselves in running their own economy, which were -- and remain, of course, at the core of global finance and of the global economy, and that is something that we have to take fully into account. And it's -- (inaudible) -- upon the industrialized country to be themselves fully conscious of the fact that they have their full role to play in the G-20 because they remain fully responsible for a large part of the core of global finance and of the global economy.

And again, I said already that, in my opinion, we could not afford a second time to have to cope with the challenge that were dramatically erupting a few years ago. But it would be particularly -- I have to say, for the industrialized world, particularly dramatic if it proved that it was impossible himself participating fully in the G-20 to regain control of this evolutions.

Let me say a word on something which has happened also quite invisibly, but in front of eminent central bankers. I cannot help mentioning also that in the cooperation between central banks we had large, very large ownership -- which has been prepared by the creation of the global economy meeting in Basel, by the full participation of a large number, a very large number of central banks in our discussions in the preparation, in the, I would say, orientations that we were giving to a number of committees that are not very visible but very important at a global level.

But there also we had shifted the prime grouping for governance at the level of central banks. It is now another G-10 who is the prime grouping for governance of central banks. It is the global economy meeting which again comprehends a large group of central banks of the industrialized world and of the emerging countries. And this is something which, of course, is parallel to what has been done at the level of the ministers, and governors, and at the level of heads, and which is also illustrating to which extent, at the moment of these crises -- which, again, in its quantity and quality, if I may, is so dramatic, is coinciding with a very, very important and dramatic change of global governance.

Now, I don't want to elaborate on how we fared during the crisis. I don't want to elaborate more on the G-20 or on what goes with the much, I would say, larger ownership of global governance at the level of the central banks. I already mentioned that we had changed the system of governance of central bank operation. But we have the Financial Stability Board -- which was also anticipated at the moment of the Asian crisis, Bob, the Financial Stability Forum, which has been reinforced, given a mandate which is enlarged, and which is much more inclusive. At the time it was a G-7 grouping, and it is now, again, more or less incorporating, in various forms, this global new ownership of governance.

Now, let me perhaps conclude. You gave me, very generously, a quarter of a hour. Let me conclude to mention a number of -- a small number of points, which seems to me very, very important at the global level, on rules and regulations on the one hand, and on the overall mutual assessment of the macro-policies of the members of the G-20.

I trust these are the two sides of the coin: If we want to be as sure as possible that we make the world a much more resilient entity -- the global finance and the global economy, we have to be as active as possible in being sure that all the new rules, regulations, standards and codes that we are working on, and in all the dimension of global finance, would be, I would say, well-prepared and as optimum as possible, and we have also to care for the macro policies.

On the first side of the coin, I would say it is of utmost importance that the new Basel rules that we are preparing, and we are in an intense phase of discussion after having had the input of the industry -- the industry was in dialogue with the Basel committee, we have this industry response and now we have to engage in calibration, and a calibration exercise which is, of course, of utmost importance. And we have to engage in the impact studies to see exactly how to optimize the new rules, particularly in terms of capital requirements, in terms of liquidity monitoring, and all what is the core of the new banking supervision. And I'm speaking under the control of -- (inaudible) -- who knows that better than anybody.

But what I would insist on is that it is extremely important that we have really a level playing field, that we have really, at the global level, the same rules being applied by all. This is very, very important, in my understanding. Of course, for the good and appropriate functioning of global finance, it is extremely important that we, in this new ownership of global governance, have, particularly on both sides of the Atlantic, the implementation of the same rules in the same fashion; not to create the sentiment between us, on both sides of the Atlantic, that we are not in the same universe, which would be a -- would be a very big mistake. And also, with all the friends that are coming from the emerging world, not to give the abominable example, then after having created the G-20 as the prime grouping for global governance, we are clumsy enough to have difference of views and not appropriate implementation on both sides of the Atlantic.

This is true for the -- it's true for absolutely everything, of course, for the Basel rules I would say also, of course. But I know that it is delicate for the accounting rules; we cannot afford to have different rules -- significantly different rules on both sides of the Atlantic and at the global level, with the ISB on the one hand and the FSB at the other hand. This is also something which has to be fixed. It is extremely important.

And I could give another set of such examples. They are areas where it is really very important that the core standards, the core principles are applied in the same fashion. Of course, there can be some differences on a country-to-country basis, but, again, we have to be very, very clear on this element which is key, in my opinion: the level playing field at the global level. I could elaborate more on that.

The questions perhaps will permit to explore more, because as you know, we are not only dealing with the banks themselves; it is the full body of the system which is at stake -- the non-banks, the markets, the transparency; the principle of having much more transparency; much less short-termism if possible -- I know how difficult it is; and much less pro-cyclicality than we had in the previous system. These are the main avenues, but it has to be applied in all part and parcel of global finance.

(Inaudible) -- that it is the conclusion on the other side of the coin, which is the appropriate surveillance at the level of the systemic economies of the world of the whole macro policy, to be sure that we are not permanently creating, paving the way for major difficulty because the constellation of imbalances would be such that we would know that at times we would have a sharp and abrupt correction.

And that, of course, is something which is extremely important which has been already tried in the past, I have to say with the multilateral surveillance. But very sullenly the 20 have decided to embark into this new kind of concept of mutual assessment of their own policies, helped by the IMF, but with an element of peer surveillance. And there it seems to me, the stakes are extremely high.

We knew the difficulty. We knew the enormous difficulty in a world where the global economy or global finance are now the pertinent entity. We had the demonstration that it was the pertinent entity. At the same time we have no global government, we have no global executive branch and no global parliament. So we have to coordinate appropriately our various decision-making processes for those decision-making processes to internalize the externality that is associated with their own decision at the global level. And of course, I'm speaking in front of the citizens of a very, very great democracy.

The tendency of our democracy is to be inward looking and I know that myself very, very well. There is an irrepressible tendency to be inward looking. What we need is exactly the contrary. We need to be sufficiently looking abroad to understand exactly that the optimum is not necessarily the suboptimum at the level of this particular economy and country -- and I'm not speaking, of course, particularly of the U.S., I'm speaking of all the participants -- but that it is something which has to be replaced in the context of a larger optimization at the global level.

We are all cold now, and that's the reason why, I think that the communication and explanation, tireless explanation of -- on the real world, in which we are, is necessary because our political leaders are depending -- the democracy, this is very reassuring -- on their own people. And if their own people understand, in general who they are, the task of course of the leaders is considerably simplified. If communication is poor, explanation is poor, and I'm thinking not only of course what is being done by the leaders themselves but by all the communication channels that exist in our societies. If that job is not done correctly then we complicate formidably what I call the second side of the coin.

So I see that I was perhaps a little bit too long, Bob, but I think that it's about time to sit down now. Thank you. (Applause.)

RUBIN: Jean-Claude, you were terrific. Let me just ask a couple of questions and then we will open the questions to the members.

I guess question one really goes to the last point that you were on. If you look across the industrial democracies, I think almost -- well, with the exception I guess of Germany basically, maybe to some extent your own country, France -- you see these enormous structural deficits and at the same time we've paced, and very often extended monetary positions -- central bank positions as well, certainly the United States with our quantitative -- (inaudible).

At the same time we have very high levels of unemployment and very slow economies. So you talked about getting back to a position where we reduced our structural deficits and our central banks put themselves in a position so we could be resilient again. How are we going to resolve the conflicting imperatives that both dealing with our short-term situation, which is very difficult, and our structural physical situation which is equally difficult and in a longer-term sense deeply threatening?

TRICHET: I think you're absolutely right that the balancing act is certainly very demanding. Now we have always said ourselves, even when we were close to the heat of the crisis, that in any case you have to do what was necessary on a short-term basis because you were in the situation which was extremely demanding -- it was true for the central banks, it was true for the government -- that at the same time one should never lose the medium, long-term perspective because if at any moment the medium, long-term perspective is considered to be put totally out of, I would say, sound concept, a sustainable concept, then it would play immediately against what is done in the short term through the -- (inaudible).

If our households, if the entrepreneurs if all the, I would say, markets are losing faith in the capacity to be sustainable in the long run, the mark of the present functioning of the economy is that then they lose confidence immediately and it goes against what is probably the goal, they need to help the recovery as where as possible. So one has always to take the appropriate decision on a short-term basis when, you know, situation is extraordinarily demanding, and not lose the long-term prospective.

And we always said ourselves that it is indispensable in our fiscal policies because, it was really your question, to be sure that in any case whatever is done, there is a going back to a sustainable position. I think that this is something that goes without saying normally, but of course in the heat of these dramatic events, that could have been forgotten. But now we are in a situation where nobody can dispute that every entity at the global level has to work out an appropriate medium, long-term recovery program for, I would say, public finance. And it seems to me that it's true in the industry as well. I have to say that in the emerging world we are in a different universe, we are in a different universe. They had their problem before, they had to go through the abominable crisis in Latin America and in Asia, but they learned the lesson the hard way and they are not in such a venerable situation.

RUBIN: You know, it's interesting, Jean-Claude, you reminded me of something. In 1993, when President Clinton put in place the Deficit Reduction Program, one of the comments he made, and I think it goes to this very point you just made about whether we can afford to let the fiscal imbalances -- whether we can afford to put that question off for a while -- he said that once -- at least it was his view -- that once he put in place the Debt Reduction Program that enormous positive feedback effects on confidence in the short term. And that he also felt that had he not done so that there might have been a more general lack of confidence -- the very point you made, which I think is a very good point.

Let me ask you this, Jean-Claude as a second question. You referred to surveillance and I believe you referred to internalizing externalities, which I think is a very good way to put it. You've lived the realities of the politics of trying to coordinate economic policy for a long time.

Do you think there's any realistic likelihood that we will figure out some way of creating mechanisms that will cause for example, the United States Congress to decide that it needs to look not only at its own country and doing what it thinks makes sense here, itself not an inconsiderable issue, but also, as you said, the externalities in terms of effects elsewhere or similarly the Chinese government looking at their exchange rate or the difference between export-led model and domestic demand grown model, and considering not only the internal effects but the external effects.

Other than more -- is there mechanism that you can foresee that would trade away some sovereignty so that we would have something more than just moral persuasion. And if not, what does that leave us with in an evermore-interconnecting global economy. These are the meditations we used to have at dinner, remember?

TRICHET: (Chuckles.) Yeah, exactly. That could have been one of your dinner main points.

First of all, it seems to me that it is exactly the heart of the main challenge. We have a global economy, which is the pertinent entity -- not only global financing -- it is a pertinent entity. We could see that we were so interconnected that again a single event could exert its own influence immediately all over the planet in a question of a half day. So that is a fact. It is also a fact that the various economies concerned are spontaneously, formidably inward looking. That's a fact.

My suggestion was that we had to make our own people -- I was speaking of democracies -- China has its own way to manage itself. But I fully agree with you of course that there is exactly the same problem there -- how to assure that you internalize the -- (inaudible). This is a -- (inaudible). It means how we make our own decision making processes in our democracies, our own people fully aware of the fact that they have to accept that the global stability and prosperity is essential as a precondition for their own domestic stability and prosperity.

Again, enlightenment of all. But I think very often, we put the blame on the politicians, if I may. But it seems to me -- it seems the full body of the society which is at stake, all those who knew should speak more in my understanding. All those who know should speak more. It is certainly a case of the -- of the real economy responsible persons of all opinion leaders.

Now, don't be shy. Don't be timid. Explain in which universe we really are. And I know of course much better Europe than the United States. What strikes me is that it's much more easy in a small economy, which is by definition very, very internalized because they are so small. So the people knows that what the rest of the world is doing is extremely important.

The bigger you are in an economy and the more -- the stronger is the culture of that economy predicting from external communication, of course, the more you have a difficult problem. And I will not be surprised in the biggest of the industrialized economy has a particular problem in this respect. But we have shown exactly the same phenomenon in Europe, I have to say.

RUBIN: I think of the -- well first, that was a very thoughtful response, and these were the kind of conversations we used to have. And secondly, I think it -- I'd just make the point that the world is complicated.

Why don't we now take questions from the members. Is there is anybody who does not perfectly understand the world, Jean Claude will provide you with wisdom.

Yes, sir. State who you are and briefly state one question, okay.

QUESTIONER: Kevin Harrington from Clarium Capital. In 2006 to 2008, the ECBU was one of the central banks that expressed a concern about the effect of oil prices on the movements of capital markets. And that in part led to your raising rates in July 2008, in spite of the economic slowdown that was developing at that time.

We're now faced with oil-back at 85 (dollars), but the money supply in Europe contracting. How do you balance those two as a central bank? Where does oil price -- where do oil prices have to go before one would switch away from a hyper-stimulus state to something else?

RUBIN: You can tell who runs a trading operation. (Laughter.)

TRICHET: First of all, as you know, we have a monetary policy concept which is based on two-payer strategy. But the objective is to deliver price stability in line with our definition, which is quite simple. We are very candid in giving the definition of price stability -- the yardstick to judge what we are doing. And of course, also we are candid in trying to anchor as well as possible in social expectations.

What we did at the period you have mentioned, we did it because there was the start of what we considered dangerous, the sentiment because we had a number of negotiations which were taking place. And we could see that the working assumption that price -- that the inflation in the medium term could be different from the definition of price stability was gaining in -- (inaudible). So that we were -- we had the threat of this unincurring of inflation expectations, which were before very well anchored.

And we took that decision to show our determination to solidly anchor expectation, and the need to deliver in the medium term -- in the medium long term our definition of price stability. It proved useful in the immediate I would say days or months which followed, because we could see that the negotiations were taking a different mode. Then of course, we had the -- what I call the intensification of the crisis.

And I have to say that in the intensification of the crisis, the fact that we had very solidly anchored inflation expectations helped us. We were never at -- below zero in terms of future inflation. So there was no materialization in the mind of the market participants and observers. And -- (inaudible) -- no materialization of the deflationary risks, which for us was a formidable help in the circumstances.

And now, what we are looking at is of course the multiple dimensions in which we operate. We consider that there is correct anchoring of inflation expectations. We see that -- we consider that, that for the present moment, we have inflation under control. And that the reason why, I have said that on behalf of the governing council, that the present interest rate were for us appropriate.

But that doesn't mean anything but it is our judgment today. I don't want to anticipate in any respect future decisions. You know that we have the theory according to which we are not pre-committed. We do always what we judge appropriate to deliver price stability in the medium term. And we are not the prisoner of promise or of a mechanism.

Now, you will tell me -- do you indeed deliver price stability according to your definition? And I would say, of course it depends on some -- of the price of oil, as you have said. But since the 1st of January '99, to the end of this year, I expect that the average yearly inflation would have been probably something like 1.95 percent. So our (definition ?) being less than two, close to two, it would not be that bad in terms of confirming that the -- (inaudible) is in line with the yardstick that we gave at the very beginning.

RUBIN: Yes, sir.

QUESTIONER: John Brademas. Sir, I am the first Greek-American elected to the Congress of the United States. And that's the background of my question. (Laughter.)

RUBIN: But you want to ask about France? (Laughter.)

QUESTIONER: What do you see in respect to the Greek situation? I yield back the balance of my time. (Laughter.)

TRICHET: I would -- you know that negotiations are taking place in Athens. And I would not comment because negotiations are taking place. I'm confident that they will be concluded soon and rightly. They are led by the IMF, by the commission and we are present also. I have a number of experts that are in liaison with the commission and are on the spot.

RUBIN: Henry.

QUESTIONER: Mr. President, I'd like to ask you a question concerning your major financial institutions in Europe. To what extent is their capital adequate today? To what extent do they still currently have major toxic assets? And to what extent are they capable to coming back as active lenders and investors?

TRICHET: Very important question of course. You know that the European economy -- actually the -- (inaudible) -- economy, -- (inaudible) -- the case for her all over Europe, the 27th, is massively financed by the banks, and not by the markets. So it has been the main difference between both sides of the Atlantic. And also, it explains why our non-conventional measures in Europe or in the ECB were different from the non-conventional measures taken in the U.S.

At the moment I'm speaking, we have observed I would say slight decrease in the rough figures we have of the outstanding credit with increase of the outstanding credit to households, in my memory over 12 months by 1.8 percent, and a decrease of the outstanding credit to the corporate by minus 2.5 percent or something.

Of course, in the U.S. where the financing goes massively through markets, I have seen diminution of credit outstanding by banks that were much richer, more impressive, if I may, in the negative figures, but it cannot be compared. It should not be compared because of the difference of structure.

That being said, I have to say that after the recession we had, it is normally -- our own observations over the previous cycle to see that the loans to households are picking up before the loans to corporate, so we had a decrease of both. Then we see now that loans to households are more dynamic, and it is always what we had observed.

That being said, we are calling our banks to do whatever is possible, of course, to reinforce their balance sheet, to reinforce their capacity to do their job, which is to finance the real economy and we are very, very active in that. We are telling them that we certainly did not embark into these very bold -- non-standard measures only for their own pleasure, that we were doing that exclusively to permit the appropriate financing of the real economy in circumstances which were particularly difficult.

We are very, very strong on that and our message is very strong. The magnitude of the issuance of new equity that we have observed in the (EU ?) here since the crisis, the start of the troubles and, of course, it started a little bit later than in the U.S., but is around 200 billion Euros of reissuance of capital.

A number of options remain open, but for some of them which have major difficulty to utilize the options of capitalization which the government have presented, we tell them, "If you are in such a situation, don't hesitate," and I take your question as, you know, permitting me to reshape that message that they have to do whatever is appropriate to reinforce their balance sheet.

Now there is also all -- precisely the question of abiding by the rules and the industry more or less in the dialogue that we have with them is more of saying, "Be very careful because if you are too demanding, then we would have problems for precisely the financing of the economy," and we are telling them, "Okay, we know that. We have to be sure that the system is resilient in permanent regime, that is an absolute obligation," and that's what must -- I think I was sufficiently clear on that.

As they said, we will see how to organize the position because, of course, we have to take account realities -- immediate realities today, but I think we have to be flexible on the long-term, permanent regime.

RUBIN: Yes, ma'am.

QUESTIONER: Lynn Forester de Rothschild, E.L. Rothschild. Could you tell us what you see as the biggest differences between the European and American views of financial regulatory reform?

TRICHET: (Laughs.) I think there is a unity of purpose, which is very big. And of course, we are in universe which structurally are very different. I mean, if I oversimplify, 75 percent of the financing of the real economy in Europe goes through the banking intermediation and I would say only 25 percent probably in the U.S. I mean, of course, it's an oversimplification, but it is important to have that in mind. And, of course, it creates an interface with the various part and parcel of global finance and particularly with the interface with the banking community, a substantial difference.

Another substantial difference which is also clear is that the model of banks in Europe is different. If I may, at least the very center of the bank's business model is different. The influence of investment banking is much stronger in the U.S. than is the case in Europe. And that also makes a number of differences in sensitivities and in the dialogue that we have with the industry.

I also already mentioned that the accounting rules are, for me, perhaps one of the major problems we have. Of course, it's understandable that, precisely because the business model is not the same, the dialogue with the accountants is not the same, but it is a big problem. We need, in my opinion, accounting rules that would be the same on both sides of the Atlantic at the level of the (globe ?), and it is not the case, and it is one of the areas where we have to work very actively.

If it were not the case when we applied the new rules, then we would have to conform a little bit the rules to take into account that we are not speaking of the same accounting concept on this side of the Atlantic. It would complicate formidably the application, the -- (inaudible) -- the implementation, the same rules at the global level and again, not only at the level of the industrialized countries.

At the level of the emerging world, as well, and I have to tell you, being myself an actor and a witness in all these discussions, they are in fact very good, very proficient, a lot of good ideas, and this intellectual ownership global industry that I was mentioning is there. Very, very impressive. And I mean, we again, we cannot be -- (inaudible) -- in our own discussion.

RUBIN: We'll go way back over there.

QUESTIONER: Thank you. Mahesh Kotecha. Mr. President, you said -- Structured Credit International. You said that the G -- the big change -- one of the big changes is that center of gravity for decisions on global governance has shifted to G-20. There is not much of kind of a secretariat or, you know, institutionalization of support for that kind of a dialogue. Do you see evolution of that? And if so, how?

TRICHET: Had I read my paper (laughs), I would have, of course, made a difference between the international financial institutions that are established by your treaty and where you have to improve governance and permit the emerging world to be progressively -- this is work in progress, more influential and would that make the difference with what I've called the informal -- (inaudible) -- like the G-7 or the G-12, now the G-20, that are absolutely decisive for permitting true converge, to make our legislation, our rules, our regulations which, some are covered by the international financial institutions, to be as converging as possible, and also the macro policies.

I would say that as regards the informal grouping, what has happened is, as I said, a revolution. It's absolutely fundamental what has happened. In the international financial institutions, it is work in progress. I have to say it's quite complicated, but it's work in progress, and I have no doubt that we would have an appropriate representation and a consensus to proceed. I am the witness and we are not ourselves directly participating in this negotiation.

RUBIN: I think we have time -- the Council has a tradition of always ending on time, so I think we have time for one more question, and the gentleman way in the -- maybe in the last row or thereabouts.

QUESTIONER: President Trichet, I am James Tunkey. Thank you for your thoughtful comments. Of the 27 percent of GDP commitments that have been made, what's your estimate in three years of the percent that will remain unrecovered and what do you believe to be the two obstacles to recovery? Thank you.

TRICHET: (Laughs.) I will not give you any figure. (Laughter.) But again, I will repeat what I have said. Had we not won, we would have lost an enormous amount of money. An enormous amount of money! Because in most European countries I look at, the loans that have been given at a certain moment are returned with the appropriate interest rate, so the governments can tell their people, "We made money out of this. We made money out of that."

I would say in a (large ?) number of cases the intervention in capital has also proved to be a winning intervention. And so, again, what strikes me is at the end of the day, in my opinion, it would be, depending on the country negative -- but not, of course, that big -- or slightly positive. That would probably be the result and, of course, in each democracy you would have to explain that and it would be, of course, certainly very difficult to explain why in some cases it is a negative result.

RUBIN: I think we have time for half a question.

TRICHET: Okay, you're right. You're right.

RUBIN: No, no, no, I didn't realize you hadn't finished. I apologize.

We have time for half a question more. I'm going to ask that question. Let me ask you this. (Laughter.) You just left the G-20 and when you meet with the, particularly the finance ministers, and they're obviously consumed with trying to work their way out of the current crisis.

I'll speak for myself. I look at these enormous fiscal imbalances, Jean-Claude, and they really are deeply, deeply troubling to me, and I think they pose an enormous risk, with the timing of that risk obviously being impossible to predict. Do you get a sense that that is getting sufficient weight as they think through their policy balances?

TRICHET: I think one of the difficulty they probably have is that not so long ago the global motto was "Spend as much as possible as rapidly as possible." I was never that happy with that motto. (Laughter.) I was always saying, as I said, you know, "Keep the sense of the long-term, medium long-term direction."

Of course, we have to do things that are extraordinary today, but let's keep a sense of the long-term sustainability of what we are doing. It is essential and on top of that, all countries are not alike, so a global motto is not necessarily appropriate even if we are in exceptional circumstances. It's the same for central banks. I don't like this when I hear, "All central banks should be accomodating as long as possible, and" -- no, central banks have to do what they have to do.

Some have all they need to increase rates. It is the case in Australia, for instance, and it should be obvious -- I mean, they should not follow a global motto. And I said what it was in our own case, and I trust that we do exactly what is appropriate, okay?

Again, it has to be filtered through the appropriate analysis, and what counts for us extremely (marginally ?) because it's also a help in times of very great difficulty. It is the anchoring of inflation expectations, (I explain ?).

RUBIN: Jean-Claude, we thank you. (Applause.) What this reminds me of is -- (applause). Thank you for your wonderful combination of thoughtfulness and charm. (Laughter.)

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